Special
Berkshire Hathaway --
A Treat*

By Selena Maranjian (TMF Selena)

Trading at $55,500 (A shares) and $1,834 (B shares) as of October 25, 1999

If you've spent any time hanging around Fooldom, Berkshire Hathaway (NYSE: BRK.A and BRK.B) will be a familiar company to you. But for those of you who may be new, let's start with a quick introduction.

Berkshire Hathaway is a holding company, headed by none other than Warren Buffett, arguably America's most successful investor. Buffett and his wife own about 40% of the company, so he has quite a stake in the firm.

Berkshire's principal line of business is insurance, which contributes about two-thirds of earnings before investment gains or losses. Berkshire owns all of auto insurance giant GEICO, as well as property-casualty mammoth General Re. It's a leader in "supercat" reinsurance -- which protects other insurers when, due to catastrophes such as floods and earthquakes, they end up owing more than they took in through policies.

Along with insurance, Berkshire also owns some other businesses outright. A few:

  • Borsheim's Jewelry
  • The Buffalo News
  • Dairy Queen International
  • Dexter Shoe
  • FlightSafety International
  • Nebraska Furniture Mart
  • The Scott Fetzer Company
  • See's Candies
Berkshire also owns chunks of other companies, through stock holdings. Below is a partial list, showing what percentage of the firm Berkshire owns. (Note that the data is as of the company's last annual report. Things may have changed since then.)
  • Allied Domecq* (2%)
  • American Express (11%)
  • Coca-Cola (8%)
  • Federal Home Loan Mortgage Corp. ("Freddie Mac") (9%)
  • Gillette (8.5%)
  • Walt Disney (3%)
  • Washington Post Co. (17%)
  • Wells Fargo & Co. (4%)
*Under U.K. company Allied Domecq's umbrella you'll find Baskin-Robbins, Dunkin' Donuts, Beefeater gin, and Kahlua, among other things.

Berkshire naturally receives a lot of cash regularly from the earnings of its wholly owned business units. It also profits from its insurance unit, but in a way you might not have thought about before. Insurance companies take in lots of money each year in policy premiums, but they don't have to pay it out to cover loss claims immediately. The cash the company gets to use in the meantime is called "float," and it's money that Warren Buffett, investor extraordinaire (and a couple of other pretty smart investors at Berkshire), get to invest.

This money usually costs Berkshire nothing to use, since the company often underwrites policies at a profit or at breakeven levels. So this is an extremely convenient arrangement that essentially is loaning money to an effective allocator of capital. (And who benefits? Shareholders.) Other companies would have to borrow money at a higher cost or issue more shares to finance such investment activities. This source of low-cost to no-cost capital is a key part of the wealth creation dynamic at Berkshire that many pundits don't even begin to fathom.

I'll now run through a few reasons why you might consider looking into Berkshire Hathaway as a candidate for your portfolio. Note, though, that I'm limited to around 750 words here. For many more reasons, check out what Fool Robert Miles has compiled: an impressive 101 Reasons to Own Berkshire Hathaway. (He's now busy on the Fool Berkshire message board, working his way to 201 reasons!)

Performance: Here at the Fool we like to point out that even the busiest investor can at least perform as well as the market average by plunking money into an index fund. To do much better than that, we explain that you'll probably need to learn more about how to evaluate and analyze companies. Well, there's another way to outperform the market handily over the long haul: with Berkshire stock. As Warren himself explained in his 1998 letter to shareholders, "Over the last 34 years... per-share book value has grown from $19 to $37,801, a rate of 24.7% compounded annually." That's about twice the growth rate of the stock market as a whole. By investing in Berkshire stock, you essentially get the services of Warren Buffett investing on your behalf. Many wing-tipped money managers on Wall Street will charge you arms and legs and deliver poor results. Warren Buffett doesn't charge you -- he rewards you.

Robustness: This is no flimsy company, no flighty high-flier, no flibbertigibbet of an enterprise. It's grounded in businesses with plenty of staying power. Insurance. Candy. Pilot training. Ice cream. Jewelry. Furniture. Soda. Razors. News. Charge cards. Donuts. Shoes. These are not pop rocks. Or pet rocks. Or "Cop Rock." They'll be around for a long time.

Price: First off, if you're not aware of how Berkshire's shares are priced, grab a glass of water and have a seat. Take a few deep breaths. There are actually two versions of shares available: the original ones, now called class A, and the newer, less expensive class B shares, priced at one-thirtieth of A shares. To buy an A share, you might have to sell your house. But class B shares are affordable for most investors.

This is a particularly auspicious time to consider ownership of Berkshire stock -- once you've done enough research on it to know that it's a move you want to make. In the past year, B shares have traded as high as $2,700 per share. They're now considerably below that. Five months ago, my colleague (and Berkshire expert) Dale Wettlaufer calculated the stock's intrinsic value to be $2,567 per share. Not too much has changed about the company since then -- except that its stock price has fallen.

Value-added: Being a Fool is about getting your financial house in order and about enjoying the process, as well. This is a highly enjoyable company to follow. For starters, the guy at the top is eager to share with you how the company is doing, in 20-some-page annual letters to shareholders. Even if you never invest in this stock, you'd benefit a lot by reading as many of these as you can. They're written very clearly (and entertainingly) and offer much insight into investing. The Berkshire website contains Buffett's missives to shareholders from 1977 to 1998. Finally, there's Berkshire's annual meetings -- dubbed "Woodstock for capitalists." We sent a Fool out to last year's meeting in Omaha and she came back gushing.

Take a closer look at Berkshire Hathaway, won't you? Read through the links above and below. Consider the risks and attractions. And perhaps invest in this fine company. You may soon be gushing, too.

Next Treat -- Hershey

Berkshire Hathaway Company Information:
Trades on NYSE under symbol BRK.A and BRK.B

  • Berkshire Hathaway's website: www.berkshirehathaway.com
  • Current Quote
  • Berkshire Hathaway's Chart
    Other Related Links:
  • Warren's World: A feature on Berkshire Hathaway
  • A Fool in Omaha: The Berkshire Annual Meeting
  • Warren Buffett: Profile of an Artist as a Young Man
  • Books and articles on Warren Buffett and Berkshire Hathaway
  • The Fool's Boring Portfolio buys into Berkshire Hathaway
    * A Trick or Treat represents the opinion of one Ghoul and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Ghoul's thoughts.

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